The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be able to earn elsewhere) and still earn an economic profit of $800. The owner's concern is that he will not be able to monitor the manager's behavior and that the manager would therefore be in a position to embezzle money from the business. The owner knows that if the remote office is managed dishonestly, the manager can earn $4,500, which results in an economic loss of $600 per week. (Hint: Construct a decision tree to help you answer the questions below.) a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office? Yes O No b. Suppose the owner knows that a managerial candidate condemns dishonest behavior, and who would be willing to pay up to $7,000 to avoid the guilt she would feel if she were dishonest. Will the owner open the remote office? O No Yes

The owner of a thriving business wants to open a new office in a distant city. If he can hire someone who will manage the new office honestly, he can afford to pay that person a weekly salary of $2,000 ($1,000 more than the manager would be able to earn elsewhere) and still earn an economic profit of $800. The owner's concern is that he will not be able to monitor the manager's behavior and that the manager would therefore be in a position to embezzle money from the business. The owner knows that if the remote office is managed dishonestly, the manager can earn $4,500, which results in an economic loss of $600 per week. (Hint: Construct a decision tree to help you answer the questions below.) a. If the owner believes that all managers are narrowly self-interested income maximizers, will he open the new office? Yes O No b. Suppose the owner knows that a managerial candidate condemns dishonest behavior, and who would be willing to pay up to $7,000 to avoid the guilt she would feel if she were dishonest. Will the owner open the remote office? O No Yes

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter5: Investment Decisions: Look Ahead And Reason Back

Section: Chapter Questions

Problem 9MC

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